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Using the right tools: Your game plan

Apr 15th 2015 |

Treasurers, whose responsibilities no longer stop at cash management, are now in an ideal position to influence the strategic vision of the organisations they work for. How? Here the treasurer’s understanding of the organisation comes into play.

“[Soccer player] Cristiano Ronaldo can do step-overs, score from distance, play on the wing or up front, but he doesn’t necessarily want to be applying all of these skills at once,” says James Kelly, head of treasury at Rentokil Initial. “It is the same for treasurers. We need to select the right tools for the right occasion.”

The treasury department at Ahold adds value to the business in a number of ways, says Andy Nash, SVP and group treasurer. “We make recommendations for capital structure and how to improve balance sheet efficiency. For example, we recommended public targets for gearing and liquidity and have been working towards them, we also recommend the dividend for the common stock.”

Having effective communication with management or other business units is critical for treasurers who want to influence company strategy. “The skills that treasury has allows us to clearly demonstrate to the business or senior management how we can add value to the organisation,” says Kelly. “For example, I do a lot of debt modelling and recently this has changed to looking at the company more broadly. I can demonstrate to senior management the impact that 1% revenue growth has, what 2% revenue growth has, and so on, as well as what effect this has on areas such as debt metrics, and what the likely knock-on impact could be.” Treasury is also the guardian of Ahold’s investment grade credit rating, Nash explains, which is a cornerstone of its strategy. “Here it is important to communicate to operators in language they understand, ask them which tenant a landlord prefers – with or without investment grade – and then go on to supplier days,” he says.

“We find that operating in this manner means that we have won them over before even beginning to discuss issues such as the debt capital markets, availability and pricing, says Nash. “In addition, our treasury provides funding solutions for potential mergers and acquisitions [M&A],” he adds. “As well as any due diligence work, treasury needs to show the impact on credit rating and recommend the most efficient funding structure for this activity.”

Collaboration throughout

To add value, treasury must not be a silo, it must instead work actively with other parts of the company. Treasurers that have already achieved best practice in cash management find that the process involved has been good way of embedding cooperation.

“We have a number of key priorities beyond cash and liquidity management,” says Ricky Thirion, group treasurer at Etihad Airways. “For example, there is risk management and the hedging of our key financial market risks such as fuel, foreign exchange (FX) and interest rates. Funding is another priority. We have a large ongoing need to finance aircraft deliveries and capital expenditure in the external financing markets. We will raise approximately US$2 billion in the next 12 months.”

The additional priorities don’t stop there. “Our treasury supports the strategic expansion activities of the airline by supporting M&A activities and the various partnerships and investments we have in other airlines,” adds Thirion. “We are also managing and continuing to expand our global banking relationships and the underlying facilities and services from our banking partners and other players in the financial markets. We conduct regular non-deal roadshows to the major global financial centres at least once a year,” he says.

“Additionally insurance, most notably aviation and medical insurance for our global operations, is a priority, ensuring compliance with local and international market requirements.”

Etihad group treasury works very closely with the corporate strategy team and various departments that jointly form its M&A/investment projects team, Thirion explains. “These teams cover almost all key disciplines across the airline so we do have extensive relationships with other departments across the business on an ongoing basis. In our day-today operations we work very closely with the major spenders as far as Capex and Opex are concerned as well as the procurement team to ensure we consider all commercial issues, including the managment of risks such as FX and interest rate risk.” Many treasurers find that supplier finance projects and supply chain finance programmes mean teams – particularly procurement – have to work in lockstep with treasury. “We are also piloting a supplier financing project which is intended to generate commercial value for us and support our key suppliers’ working capital,” says Thirion.

At Ahold, collaboration is important for Nash. “Our treasury works with the procurement teams on a daily basis in a couple of different ways,” he says. “We train them on the impact of foreign exchange in negotiations and also meet suppliers with them. Our real estate teams ask for input for lease or buy decisions, while treasury works with the tax department to look at the funding of subsidiaries. We do this to achieve the best balance between capital and debt,” he says. “Treasury also sits as an ‘external’ adviser on the pensions investment committee and works with the group insurance team.”

Rentokil’s Kelly paints a similar picture. “We work closely with the tax department on areas such as intercompany funding and funding decisions,” he says.

“We work very closely with finance, analysing things such as working capital and cash flows. In most businesses the treasury department is the expert on cash flows, so you should be working closely with the finance team. What you might find is that they pull together a cash flow, but actually it is the first time they have seen what has happened in that month, whereas in treasury you have seen what has happened throughout the course of the month and therefore can add a little more value,” Kelly says.

Looking to the Future

As treasury demonstrates the ability to enhance organisational strategy and add value across the business, there is the potential for this advisery capacity to continue to grow and touch every area of the business. In this situation, the treasurer’s due diligence skills are more important than ever. “It is useful to have a clear view on potential areas that might yield something,” says Rentokil’s Kelly. “You need to put in the work and analysis in order to work out what is worth going after. It is really about delving down into what is going on beneath the surface. What you tend to find with things like this is that one in three times there is something, while two in three times it is fine and there isn’t a material risk there.”

There is a clear roadmap at Etihad for where else the treasury will apply influence. “We are focused on working closely with our partner airlines to share expertise, resources and systems,” says Thirion. “We will also focus on engineering efficiencies through the use of centres of excellence and joint management of banking relationships and supplier relationships.” Rentokil’s Kelly suggests a couple of areas that he wants to investigate. “There is an interesting angle around inflation hedging. Our contracts tend to have inflation-based increases in them, but the degree to which those increases are actioned in different parts of the world appears a bit variable. I’d like to find out to what extent we can manage our inflation exposure.”

Kelly is also interested in looking at materials procurement. “We have a workwear division in continental Europe that supplies uniforms to big automotive companies. This has a reasonable spend up front, and then you may have a three to five year contract and over the course of the contract you get your money back. There’s an interesting angle around having a look at these contracts and understanding to what extent there are FX exposures in there that we could manage.”

One thing is certain, the influence that treasury can bring to bear for the benefit of the business has increased markedly over the past five years and shows no sign of slowing down.